RBI cuts repo rate for 4th time; lowers GDP growth forecast

This is for the first time after the 2008-2009 financial crisis that the Reserve Bank of India (RBI) is cutting rates back to back to nudge growth, taking advantage of mild inflation.

RBI has cut the rate at which it lends money to banks (repo rate) by another 0.35% to 5.40 %, the fourth consecutive cut in a row and the lowest in the last nine years. The cumulative rate cut by RBI since it began its rate easing cycle in February, and since governor Shaktikanta Das took over, is 1.10%.

RBI also lowered the GDP growth rate estimate for 2019-20 lower to 6.9%, as compared to the earlier estimate of 7%. With retail inflation at 3.18% in June, India's retail inflation remained below the central bank's medium-term target of 4% for almost a year.

“A 0.25% reduction, as it has done thrice this year since February, would have been “inadequate”, while a 0.50% cut would have been “excessive,” RBI governor Shaktikanta Das said.

Das said there is nothing sacred about multiples of 0.25% cuts and also made it clear that the rate-cut call has not been taken on “gut feel” but on hard data. “Too much should not be read into it, it is judgement call which the MPC has taken,” he said, adding that it was “prudent” to be accommodative.

Four members of the Monetary Policy Committee, including RBI governor Shaktikanta Das, Deputy governor B P Kanungo and executive director Michael Patra and Ravindra Dholakia voted for 0.35% cut while Pami Dua and Chetan Ghate voted for 0.25% cut.

“The RBI cutting the policy rate by 35 basis points is an interesting policy innovation, deviating from the convention of changing the policy rate in multiples of 25 basis points. Although the governor had alluded to this at an international policy forum in February, few in the market had expected him to walk the proverbial talk so soon,” said Abheek Barua, chief economist at HDFC Bank.

Barua said that RBI has painted a reasonably gloomy picture for the economy and the 35 bps cut seems to suggest that it concedes the fact that the extent of the slowdown is sharper than it had projected earlier, although it does not see the need to push the panic button (that a 50 bps might have been interpreted as).

The bond market reaction was muted as market participants could not gauge a further rate cut guidance by the RBI. “The RBI governor while justifying the 35 bps rate cut mentioned that a 50 bps rate cut could have been excessive,” ICICI Securities said in a report.